What You Must Know About China Jo-Jo Drugstores, Inc.'s (NASDAQ:CJJD) Financial Strength
Investors are always looking for growth in small-cap stocks like China Jo-Jo Drugstores, Inc. (NASDAQ:CJJD), with a market cap of US$63m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into CJJD here.
How much cash does CJJD generate through its operations?
Over the past year, CJJD has ramped up its debt from US$14m to US$16m made up of predominantly near term debt. With this increase in debt, CJJD currently has US$7.1m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of CJJD’s operating efficiency ratios such as ROA here.
Can CJJD pay its short-term liabilities?
At the current liabilities level of US$49m, it seems that the business has been able to meet these obligations given the level of current assets of US$54m, with a current ratio of 1.1x. For Consumer Retailing companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CJJD service its debt comfortably?
CJJD is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since CJJD is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although CJJD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how CJJD has been performing in the past. I recommend you continue to research China Jo-Jo Drugstores to get a better picture of the small-cap by looking at:
- Historical Performance: What has CJJD's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.